How to Use Letters of Intent

The spirit of entrepreneurship is currently stronger than at any time in recent history. The number of Small to Medium businesses (SMEs) continues to grow and have become a significant economic factor throughout the world.

Although numerous government, non-profit, and commercial organizations and websites are in place to help those starting a new business or attempting to grow their existing concern, most owners of SMEs are still in the do-it-yourself stage.

One business document that is fairly common with any business, especially one that is in the startup or growth phase, is the letter of intent.

Business deals can be complex and often can take months and even years to complete, although for most SMEs the process is typically complete within a few months. Most business consultants agree that the most important step of any business deal is the beginning. Here is where a letter of intent for business comes into play. The letter of intent serves as the roadmap and guides the process from the early general stages until the deal is finally signed.

A business deal such as the sale or purchase of a business or a joint venture can take months, sometimes even years, to complete. It can involve numerous steps and documents. The most important part of the process is where it begins, with a letter of intent that drives the process through a general understanding up through the end of the deal.

What Is a Letter of Intent?

Letters of intent are used for a variety of business transactions including buying a business, entering into a business partnership, or a business proposal.

The letter of intent for a business purchase, for entering into a business partnership, of for other business purposes simply clarifies the intentions of all of the parties involved in the deal. It outlines the process that will take place in order to come to a final and firm decision on the sale, partnership, or business proposal.

The letter of intent gives both parties a change to walk away from the deal at any time during the process, but it also offers both parties a degree of protection and assurances. Many experts feel that a letter of intent prevents either of the parties from operating in bad faith.

Why Is It Necessary

The letter of intent provides protection and assurances for both parties. From a buyer’s perspective, it outlines what information is necessary for the buyer to make an informed decision for entering into a joint venture or to buy a business. It also gives the buyer some protection by placing him in the “right of first refusal” position and prevents the seller from selling to another party and therefore costing the buyer a great deal of time and money.

From the seller’s viewpoint, it shows that the buyer is serious and gives the seller the tools needed to evaluate the buyer’s financial position, business experience, and background.

When Is the Letter of Intent Created?

The letter of intent is generally put into place once the two parties have decided that they wish to enter into a joint venture, buy or sell a business, or enter into a specific business venture. The letter of intent spells out what information each party requires to move toward a closing date.

A letter of intent is not a contract and is not binding on either party. Generally, either party can cancel at any time based on conditions spelled out in the letter. Some letters of intent do include payments or other consideration for acting in bad faith or actions, which have a negative financial impact on one of the parties.

How do I Create a Letter of Intent?

Since a letter of intent is fairly broad and is not a legal contract, they can generally be written by the parties involved without hiring an attorney and just require the use of business English words.

Here are some tips and elements to include in a letter of intent.

The letter of intent outlines the specific actions and steps required of each party in order to reach a final agreement.

Use the KISS Principal for drafting the letter; Keep It Short and Simple. Make the letter straightforward and avoid legalese. The litter should leave open the option for changes and the ability to deal with various scenarios and the due diligence by each party continues.

Sample Letter of Intent Template

Letters of intent vary greatly depending on the exact nature of the deal that is being discussed. Hundreds of basic prewritten templates can be found online for very specific situations on sites as diverse as Pinterest, Microsoft Office, and some government sites.

However, most follow the following format:

Introduction – This is a statement of the purpose of the letter, the parties involved, a description of any business property, and relevant dates.
Transaction and Timing – This includes a general description of the type of transaction, deadlines, and sometimes the price.
Contingencies – Any contingency for the deal to be completed, such as the buyers obtaining adequate financing, is outlined in the letter of intent.
Due Diligence – Due diligence is the process where the parties make sure they have all of the information necessary to make a well-informed decision. In general, an outline of the types of information and documents each party will be requesting in order to proceed with the agreement is included in the letter.
Covenants – Covenants are binding agreements that are occasionally included in the letter such as a non-compete or nondisclosure agreement.

The final letter should be signed by both parties and notarized.